And the last will be the first. The US dollar recorded its third quarterly decline in a row, which is its worst dynamics since the global financial crisis, but the increase in the likelihood of implementing the tax reform and tightening monetary policy of the Fed can return investors' interest in the greenback. On the contrary, the British pound finished September as the best performer among the G10 currencies due to expectations of an increase in the repo rate by the Bank of England in November, but the market is increasingly heard that such a step would be a mistake.
Monthly dynamics of the British pound
Source: Bloomberg.
The first week of October allows the sterling to claim the role of the most interesting five-day currency because of the Conservative Party Conference, the anniversary of the flash accident, when against the background of low volatility its rate declined by 4% within a few minutes, and also due to the publication of important macroeconomic data on business activity. Yes, in the second quarter, the GDP of the UK slowed year on year from 1.8% to 1.5%, but the latest data on retail sales and the labor market can depend on economic growth in July-September. A hint can be given by data from purchasing managers, and its release is expected to cause a violent reaction in the pound.
Judging by the latest speeches by Theresa May, in which she discussed about the transition period after the divorce of Britain from the EU in 2019 and the need to pay for access to a single market, the Prime Minister is a supporter of a "soft" Brexit. Nevertheless, European Union leaders note the little headway in the Brexit talks, and May will have to find a compromise within her own Conservative party, whose October congress adds to the risks of casting a vote of no confidence in her leadership.
Thus, mixed data, the persistence of uncertainty around Brexit, the growth of political risks, and the US dollar that has risen from the ashes draw a gray picture for the bulls on the GBP/USD. Will the Bank of England be able to withstand all the negativity, whose main task is to maintain a strong sterling in order to limit the growth of inflation? If in September, much has happened to the BoE, then in October the situation can seriously change. Standard Bank believes that most of the news about monetary tightening has already been taken into account in quotations related to the pound of currency pairs, and as soon as at the beginning of November, the central bank raises the repo rate from 0.25% to 0.5%, the market will start to get rid of sterling in the background implementation of the principle "buy on the rumor, sell on the facts." The bank forecasts a drop in the GBP/USD price to the level of 1.28 by the end of the year.
Serious problems for the "bears" on the analyzed pair create a return to the markets of the reflation trade that dominates them at the beginning of this year. The implementation of the tax reform, the acceleration of US GDP and inflation will force the Fed to aggressively raise rates and strengthen the position of the US dollar.
Technically, the GBP/USD pair continues to implement the "Three Indians" pattern. Its future fate will depend on the ability of the "bears" to break the support at 1.326-1.327.
GBP / USD, daily chart
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